“A historic quarter”: macro strategies surge as hedge fund inflows hit highest levels since 2015

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Institutional investor inflows to hedge funds rose to their highest level for seven years in the first quarter of this year, as the industry’s strong outperformance against sharp declines in equities and fixed-income continues to drive a surge in global investor demand for hedge fund exposure at a time of extreme market volatility, macro-economic uncertainty, and geo-political risks.

The latest release of the HFR Global Hedge Fund Industry Report by hedge fund industry indexation and analysis group HFR reveals that total hedge fund capital inflows reached USD19.8 billion in Q1 2022 – the highest quarterly inflow since Q2 2015.

According to HFR, the largest hedge fund firms – those managing assets of more than USD5 billion – drew the lion’s share of investor inflows, gaining an estimated USD16.8 billion of net new capital in the first quarter. Firms managing between USD1 billion and USD5 billion experienced net inflows of USD2.3 billion, while firms managing less than USD1 billion received estimated net inflows of USD723 million over the quarter.

With major equity and fixed-income markets falling by around 5-10 per cent in the first three months amid growing concerns about inflation, interest rate rises and the impact of Russia’s invasion of Ukraine, investors are increasingly attracted by the uncorrelated returns and capital preservation being provided by many hedge funds – notably in macro and systematic trading strategies.

The investable HFRI 500 Fund Weighted Composite Index posted a gain of 0.3 per cent in Q1 – outperforming the steep decline in the tech-dominated Nasdaq Composite by more than 900 basis points, and also topping the first-quarter drop in the S&P 500 by over 500 basis points. 

The broader HFRI Fund Weighted Composite Index also outperformed, down by just 0.78 per cent in the first quarter after gaining 1.4 per cent in March – and following a positive return of more than 10 per cent in 2021.

The robust performance and strong investor inflows mean that total global hedge fund industry capital remained above the USD4 trillion milestone as at the end of March, continuing the industry’s rapid recent rise. Over the past eight quarters hedge fund industry assets have expanded by more than 30 per cent, since falling below USD3 trillion in Q1 2020 as the global pandemic began.

Inflows and returns in the three months to the end of March were led by macro hedge funds, with record quarterly gains being posted by both discretionary and systematic trading strategies in macro and commodities. The HFRI 500 Macro Index returned more than 9 per cent in the first quarter, while the HFRI 500 Macro: Systematic Diversified Index was up by almost 12 per cent and the HFRI 500 Macro: Commodity Index surged by 24 per cent in Q1.

As a result of the performance-based gains and new investor inflows, HFR reported that total macro strategy assets grew by USD40 billion in the three-month period – with quantitative, trend-following CTA macro trading strategies enjoying a particularly strong quarter.

According to HFR’s analysis, CTAs produced performance-based gains of USD27.8 billion in the quarter – while also attracting some USD3.3 billion of net new investor capital during the first three months of the year.

“Macro hedge funds experienced a historic quarter, not only leading capital increases and posting record, negatively-correlated performance gains, but doing so through intense, extreme volatility across multiple asset classes driven by surging geopolitical risks and macroeconomic uncertainty,” says HFR president Kenneth Heinz.

With interest rate volatility reaching extreme levels in Q1, capital managed by credit- and interest rate-sensitive fixed income-based relative value arbitrage (RVA) strategies increased by USD14.9 billion to end the quarter with total AUM of just over USD1 trillion. 

“RVA managers navigated not only a sharp increase in interest rates, but also a yield curve inversion, the highest inflation in 40 years, a sharp increase in sovereign default risk, an intra-quarter flight to quality reversal of interest rate increases, and expectations for additional rate increases in 2022,” says the HFR report. 

The firm says multi-strategy funds led RVA sub-strategies with performance-based gains of USD11.9 billion, as well as in net asset inflows, receiving USD6.4 billion of new investor capital. The investable HFRI 500 Relative Value Index rose by 1.73 per cent in Q1, led by a 7.1 per cent leap in the HFRI 500 RV: Multi-Strategy Index.

Other hedge fund strategy areas fared less well as managers sought to navigate the highly challenging market conditions. In long/short equity both the investable HFRI 500 Equity Hedge Index and the HFRI Equity Hedge (Total Index) were down by just over 4 per cent in the three-month period, while the investable HFRI 500 Event-Driven Index declined by 2.1 per cent.

Within equity hedge sub-strategies, losses were heaviest among healthcare and tech-focused strategies – with the HFRI 500 EH: Healthcare Index dropping 8.5 per cent and the HFRI 500 EH: Technology Index off by 6.4 per cent. By contrast the HFRI 500 EH: Energy/Basic Materials Index surged by over 9 per cent on the quarter on the back of surging energy and commodity prices, as well as accelerating inflation.
HFR’s Heinz said the hedge fund industry was well positioned for further growth as investors seek to allocate to strategies that provide capital protection and the potential for uncorrelated returns at a time of high uncertainty and risk.

“Institutional investors are likely to continue increasing their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends,” he comments. “Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth.” 

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